Once we help our clients determine their appropriate allocation to stocks, we generally encourage them to stay invested and ignore short-term corrections. However, if you are trying to decide a good entry point for money that is on the sidelines, certain historical trends indicate that now could be a good time to invest.
The old adage “sell in May and go away” is derived from the fact that historically stocks have performed much worse in the summer months and the fall. The Stock Trader’s Almanac indicates that since 1950, if you had invested in the Dow between May 1 and Oct. 31 each year, you would have earned less than 1 percent per year. However, if you would have invested $10,000 in the Dow between Nov. 1 and April 30 each year, your investment would have grown to more than $1 million.
Stocks have also done very well following midterm elections. In fact, the S&P 500 has gone up in every 12-month period immediately following a midterm election for the past 60 years. The Dow has enjoyed an average gain of 4 percent in the last quarter of the second year of each presidential term. The first quarter of the third year has been even more stellar, with an average gain of 5.2 percent. A common theory is that presidents try to boost the economy with pro-growth policies a couple years before the next presidential election.
Finally, the results of the recent elections are bullish for stocks as well. We currently have a Republican president and Senate, with a Democratic majority in the House. Since 1950, the S&P 500 has averaged 15.7 percent annual returns with this combination. This is actually only the second-best combination, as a Democratic president with a Republican Congress has resulted in an average annual return of 18.3 percent. Apparently, the market prefers gridlock to unchecked power by either side.
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